Concerns that a trade war will lead to a recession have spread around the globe. The possibility of retaliatory tariffs is on investors’ minds, with China responding with counter-tariffs, increasing the odds of a worst-case trade war scenario. Markets in Asia and Europe have declined alongside U.S. stocks. There has been a “flight to safety” as bond prices rise and interest rates fall.

Why Offense and Defense Matter for Your Investment Portfolio

I have received several calls from people worried about their portfolios. Some wonder if there is anything to do. That’s why in challenging markets such as these, offense and defense are both important. Let’s explore.

Start with a Diversified Investment Portfolio

First, I answer that they should have a diversified, durable portfolio that meets their needs.

U.S. Stocks vs. Non-U.S. Stocks

Until 2025, non-US stocks were a drag on portfolio returns as US growth stocks were the stars. Similarly, value lagged growth. Now, however, non-US and value have done better than US and growth, and these positions have helped investors.

Income-Producing vs. Non-Dividend-Paying Stocks

Similarly, having income-producing stocks and bonds underperformed the non-dividend-paying growth stocks. Now, having an income stream has provided more stability. In 2025, diversification has made a comeback. For those investors who rely on income, positioning their accounts with an appropriate level of income-producing stocks, bonds, and preferred stocks has enabled them to keep receiving the income they need, irrespective of the prices of the assets.

Growing Your Portfolio

After all, the goal is not simply to grow a portfolio at the fastest but most volatile rate but to have the highest possible probability of achieving your financial goals. A diversified portfolio historically has a much narrower range of outcomes, allowing investors to better plan toward their goals.

Investors Should Think Long Term

Investors have asked, “Do I just have to sit back and take the market decline?” I answer, “Yes and no.”

As the chart below illustrates, over time, the probability of positive returns becomes more and more favorable the longer you are invested.

History shows that, since World War II, there has not been a 20-year period in which any of these assets and portfolios have experienced annual declines, on average.

The same is true over 10-year periods for many diversified asset allocations.

>> See Why Staying Invested Is So Important For the Long Run

While this is only illustrative and is no guarantee of future performance, it clearly shows the importance of thinking long-term.

Time is an investor’s best friend. Making big changes to one’s portfolio is not necessarily a fruitful exercise. It is also hard to be out of the market because the government’s policies could change, and markets could soar.

Portfolio balance and financial planning are even more important today

Offense and Defense in Investing Strategy

In sports as well as investing, a winning strategy requires a combination of both offense and defense. Defense involves maintaining a portfolio that can withstand different phases of the market cycle.

>> See What Do Baseball and Investing Have in Common?

Offense, on the other hand, involves taking advantage of market opportunities that emerge from changing conditions. The irony is that while periods of market uncertainty may be unpleasant, they also represent times when asset prices and valuations are the most attractive.

During these times, there are actions that make sense.

• One is to upgrade the portfolio, that is, to either move to better quality companies with more secure dividends or to find solid companies whose dividend yield has increased because the price of their shares has declined.
• Second, there is an opportunity to pick up shares of growth companies that one missed on the upside and now have a chance to buy.

There are other tactics specific to each investor’s needs that can be engaged. It has been said that, “Investors make money on the buy.” This means it is important to be proactive and buy when securities are “on sale”.

For most investors, I would caution against buying speculative stocks when there is such a high degree of uncertainty in the economy. I would emphasize quality.

Volatility can create opportunities

The accompanying chart shows that the VIX index, often known as the stock market’s “fear gauge,” can spike on a periodic basis. These peaks correspond to sharp drops in the market, such as in 2008 or 2020. These are times when markets are the most nervous and, in many cases, investors feel as if the situation will never stabilize.

This chart also shows the returns of the S&P 500 over the next year. As we discussed above, there is never any certainty about returns over any single year for the stock market. However, it’s clear that the greatest market opportunities often emerge when investors are the most worried. This is the heart of the famous Warren Buffett quote to “be fearful when others are greedy, and greedy when others are fearful.”

This is especially true if markets face liquidity rather than solvency concerns. Liquidity problems emerge when market declines force some investors, specifically those who use leverage, or borrowed funds, to sell other assets. In these situations, prices may decline even when the underlying fundamentals of an asset remain unchanged. These are classic cases where short-term market moves become disconnected from long-term outlooks, creating opportunities for patient investors.

It’s important to note that this is not an argument for market timing. Even when the VIX is high, there is no guarantee that markets will rebound quickly. Instead, investors should view this as additional support for taking a portfolio perspective.

Market downturns often occur when valuations are the most attractive, and thus it can make sense to shift toward, not away from, these assets. Of course, what makes sense for a given portfolio depends on the specific circumstances.

Valuations are more attractive today

Valuations are more attractive today after multiple years of strong stock market returns. While it is still unclear where earnings will settle after accounting for tariffs, the price-to-earnings ratio of the overall S&P 500 has declined to 20.7x.

Some sectors, such as Information Technology, Communication Services, and Consumer Discretionary, have seen multiples decline more amid the broader pullback.

Assets such as gold, which often serve as safe havens, are at the same time, volatile. Recently, gold prices rose to new all-time highs. Investors are typically drawn to this asset class as a store of value in times of uncertainty.

However, gold prices can retreat if economic fears weigh on all commodities. This highlights the importance of not focusing only on a single asset class but viewing it from a holistic portfolio perspective.

Investors should focus on diversification and the assets that meet their needs and goals.

Offense and defense are both important in times of market uncertainty.

The bottom line? Offense and defense help investors manage risk and take advantage of attractive opportunities that may emerge from short-term periods of market fear. In the long run, holding an appropriate portfolio is still the best way to achieve financial goals.

Notes

Image credit: The Prospect Before Us, 1791, Artist: Thomas Rowlandson (English, 1756-1827). Art Institute of Chicago

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